Chet Bowling: Secrets of successful start-ups

When starting a business in Russia, it is worth paying attention to the registration process, as mistakes made at this stage have the potential to negatively affect all further work. How can foreigners ensure that their business launches successfully in Russia? Chet Bowling, Founder and Managing Partner of Alinga Consulting, offers some advice. He has been advising foreigners in Russia for more than 20 years, with his company providing legal support and outsourced accounting and audit services since 1999.

Situation 1

When registering a subsidiary in Russia, a European manufacturer of cosmetic products faced the need to specify a legal address before it had set up a permanent office. A lawyer advising the company offered to formally register the company with the postal service at one of its existing addresses. After verifying that this address really exists and that mail forwarding service was truly available, the client agreed. However, they began to experience difficulties six months later when Russia’s Federal Migration Service (FMS) refused to issue work visas to foreign specialists from the head office. It turned out that two dozen different companies were registered at that legal address. The FMS sent employees to verify the address, which, of course, had none of the employees from the registered companies actually working there. Fortunately, our cosmetics company was ready to lease its own office space, so things ultimately ended well with the materialization of a real office in Russia and a change in the legal address.

In starting a business without an office, ensure that you have a “clean” legal address and lease at least one work station from a consulting company.

In order to avoid such situations, the following should be kept in mind when registering a legal address in Russia:

Be sure to check the databases of the tax inspectorate or other specialized internet resources to determine whether the proposed business address is an address that is being used for mass registration. Even if the address is initially “clean,” don’t be complacent about checking it periodically, as there is the possibility that it could eventually become a mass registration address. This is important because banks carefully review the legal addresses of clients when they open checking accounts.

If you don’t plan on renting a large office immediately, please contact a company that in addition to postal service will provide you 4-5 square meters of space, communications services, and office furniture. You will have a place where you can meet all the inspectors and where it’s easy to work.

Situation 2

A large foreign company established a subsidiary in Moscow with the intention to immediately develop business in several Russian regions. Therefore, in registering an office in the capital, this company also registered separate regional divisions. In practice, most of the separate registered divisions did not conduct any business activity during the first year. However, by the end of the reporting period, the company found that the cost of accounting and tax reporting for its Russian limited liability company had increased significantly. It turned out that by law, all registered divisions of the limited liability company had to submit a profit tax declaration to the regional tax authorities even if there were no employees and no actual business was conducted. The head office also had to expand its profit tax declaration to include information related to the separate divisions. The volume of work facing the accounting outsourcing provider grew, which in turn caused the price to increase…

Only register those businesses that you are actually planning to develop.

Unnecessary costs could have been avoided altogether if the foreign company had not registered its subdivisions in Russia “for future use.” Only register a business that you actually plan to develop. Registering divisions is not difficult in Russia today, and doing so is better after actual work begins. Notifying the tax authorities upon opening a separate division under Russian law can be handled within 30 days of the first job being created.

Situation 3

A foreign recruitment agency registered in the British Virgin Islands faced unforeseen expenses in withdrawing profits from its Russian subsidiary when it was required to pay an additional 15% tax on dividends. It turned out that the problem was that the organization did not consider the specific nature of profit taxation when registering the business in Russia. Foreign companies can open either a Russian legal entity (a subsidiary, usually a limited liability company) or a foreign one (a branch or representative office). Unlike a representative office, a branch has the right to engage in commercial activity. A Russian legal entity is more convenient when it comes to producing goods, with foreign legal entities generally being used by companies operating in the service sector. The procedures for registering either of these forms of business are virtually identical, but there are nuances in taxation.

Choose a business form on the basis of area of activity (services / manufacturing), and the intricacies of taxation at each stage in the movement of funds.

A mistake was made in the choice of form for conducting business. Under Russian law, a subsidiary always pays tax on dividends, and in the absence of an agreement on avoidance of double taxation between jurisdictions the amount of tax is 15%. Russia does not have such an agreement with the majority of offshore zones. If there is an agreement, tax is paid at a reduced rate. At the same time, a branch is free to transfer funds from its accounts to the head office’s account without any withholdings and regardless of whether it has received a profit or incurred losses from operations in Russia during the reporting period. Therefore, for the recruitment agency and most other companies providing services, sometimes the best solution in terms of taxation would be to open branches rather than limited liability companies in Russia.

Situation 4

The global leadership of an international manufacturing company decided that no one would handle taking on the Russian market better than its top manager at the Swedish office. The energetic Swede was indicated as the general director when the registration documents were submitted. Motivated by the prospect for career development, the manager had six months to prepare a replacement in Sweden and move to Russia for work. To simplify the procedure for obtaining a work permit, the company took advantage of a unique feature of Russian migration law – designation of a future CEO as a highly qualified specialist. Everything was done quite quickly, but the organization found it much more expensive than it had originally planned…

Do not rush to appoint a CEO. When you register, you can specify the nominal general director.

The international company failed to realize that by law the employer was required to notify the Federal Migration Service each month regarding the performance of its obligations to pay the salaries of foreign qualified professionals. Therefore, as prescribed by law for such cases, they had to pay a CEO a salary in an amount of no less than RUB 167,000 per month. And they had to make corresponding tax payments.

As can be understood from this example, it is not worth rushing the appointment of an expat CEO in a new organization. If a leader does not plan to proceed to carry out his or her responsibilities immediately, it is better to indicate a nominee general director when registering the business. This allows you to avoid incurring extra costs and to not hurry in choosing a “real” CEO. Consulting companies, including ours, offer the service of assigning a nominal general director for registration procedures. This individual can then be changed at any time.